INSIGHT: Europe PE players struggle to manage volatility in weak market

21 November 2012 15:09  [Source: ICIS news]

By Linda Naylor

LONDON (ICIS)--Volatility, which has been the overriding feature of the European polyethylene (PE) market in 2012, with July to August reaching a peak, is expected by players to continue into 2013 as visibility remains poor.

“This is the new economy,” said a large PE buyer, commenting on the big fluctuations in PE pricing this year. “We have to adapt our processes.”

Demand is not expected to grow in 2013, but all the signs point to the need for production to remain cut back if producers’ margins are to stay positive. Players will have to manage the volatility caused by fluctuations in upstream pricing and stock shifts.

“Visibility is very short,” said a seller. “Most converters can tell you what they need in December, but not beyond that. This year has been tough and challenging.”

It is not only converters that find volatility hard to manage.

“Integration is not enough anymore,” said a PE producer. “Margins are not workable and volatility makes it much harder to manage. We are facing extremely challenging conditions.”

In the most extreme case of volatility in 2012, low density polyethylene (LDPE) prices fell by more than 20% in June alone, to €980/tonne ($1,256/tonne) FD (free delivered) NWE (northwest Europe), to bounce back up by as much as 40% by the end of August, to €1,400/tonne FD NWE.

Such large price movements have led to careful inventory controlling at all levels, as the value of stock can change dramatically.

Uncertainty in the global economy, fuelled by poor economic data in the eurozone in particular, has helped fuel the volatility seen in the PE market.

September and October PE demand was particularly poor, so producers cut back output to avoid oversupply in November. Early November saw keen spot deals of some grades, at accounts with good credit, and several large LDPE buyers were able to take parcels at €1,250/tonne FD NWE and even below.

November sellers have now sold out in many cases and are waiting for upstream movements to give direction to December pricing.

Most players now are looking further upstream than ethylene for a more accurate price direction, watching naphtha movements closely. Naphtha has been expected to move down in price since October, but on Wednesday it was still firm, at $936-937/tonne CIF (cost insurance freight) NWE, amid new Middle East tensions.

PE demand in November has improved following two poor months, but players remain very cautious.

Producers will have to cut back production carefully, and converters will maintain stocks under close control.

Imports have not flooded the market in 2012, and the ban on Iranian imports earlier in 2012, coupled with port congestion in Saudi Arabia, mean they have been less than expected in 2012.

Under such circumstances, one major producer has made it clear that it plans to increase prices in December.

“We don’t want to sell at negative margin anymore,” it said.

“There’s no way they will get higher prices in December,” said a buyer. “They have sold too much in November. What this is, is a signal that prices will go up in January.”

January PE prices have risen for the past four years in January and many buyers fear a repeat of this in 2013. However, they did not expect any period of stability.

“Next year we could see three cycles, with working capital all over the place,” said the buyer. “It will be another exercise in moving stock between buyers and sellers.”

European producers are expected to face increased competition from low-cost suppliers in the US and the Middle East, as naphtha becomes less relevant as a feedstock for PE.

Players expect naphtha-based PE to remain the base line for costs, however, allowing better margins for gas-based product.

PE is used widely in packaging and in the agricultural sector.

($1 = €0.78)

By: Linda Naylor
+44 20 8652 3214

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